Almost everything we do involves a transfer of value. Historically people used barter systems. In such systems, people allocated value to items and exchanged it as per mutual agreement. This can be as simple as exchanging a bag of rice for a pair of chickens. Money brought standardization. People suddenly had a method of exchange that had a base value, easy to use, and can use for any mode of trading, in any geography. This process continues over time.
But money always had an inherent problem, any transaction needs to have a mutual agreement, money itself could not enforce that. The Banks saw this as an opportunity. They became the trusted third party for any monetary transaction that required a high value of trust. People moved from the usual money lenders to the Banks. They moved to banks for the safe storage of their assets. The banks became a central source of funding. This continued for so long that the original vision was lost.
Money was always meant to be peer-to-peer, and if somebody can solve the trust problem, money can move back to the peer.
With the advent of the internet, people realized that data and knowledge sharing were of immense value. Very quickly the Web moved from Web 1.0 to Web 2.0. In web 2.0 we were able to introduce the concept of money integrated into the web. Payment gateways came about and we were able to shop on Amazon, eBay. We were able to transfer value. But in all these cases we were just transferring numbers while the actual money was lying in the bank. The bank also charges huge transaction fees in each case. The Banks adopted, but we never got rid of the third party.
What is a Blockchain?
Blockchain is a shared ledger hosted by multiple parties (called nodes). The ledger consists of records of transactions between different parties, stored in blocks. As the block storage gets filled with transaction data, the program creates the next block to hold the next set of records. This new block is linked with the previous block through the Hash data of the previous block. This forms a chain structure. The nodes run software that determines the legitimacy of these transactions (called consensus) before they are stored in the ledger. All the nodes share the same copy of the ledger. A single node cannot change any data in the ledger, the data in the blockchain is basically, immutable. As no single server holds the data, the blockchain is decentralized. As an incentive, the nodes get cryptocurrency as a reward for validating each block.
Functioning of a Blockchain
A recent IBM report demonstrates the current situation well. The picture below depicts the current process of Blockchain transactions.
Let’s take an example of a Secondary Car Market Process.
- The OEMs manufacture different car parts and supplies to the manufacturer
- The manufacturer assembles, adds his parts (eg, engine), and sells to the customer
- The customer uses the car for 5 years. During this period he has had accidents, multiple repairs, and incurred fines.
- When the 1st user sells the car, the question is how do you value it?
- The current valuation process is dependent on a 3rd party assurance provider (who adds a margin to the actual value of the car)
Again, why do you need a 3rd party? This is because, in the lifecycle of the car, all the data is with separate entities that are not available on request.
The 3rd party charges you to accumulate all the paperwork and still the valuation depends on his criteria.
You are also unable to check the authenticity of the parts of the car, its history. You are unable to trace it back with trust. People can forge data.
With Blockchain, since its inception (starting from the OEMs) or even before, the data of the car is part of an immutable database. It will be impossible to tamper with it. As all concerned parties will keep on updating this data in this central database, whenever needed, a person will be able to so see end-to-end tamper-proof data and make better decisions. The seller will be able to justify the value and the buyer will be able to accept it, Blockchain will provide the assurance. The administrative role of resellers will be eliminated / or limited to repair and quality checks.
What Problems does blockchain solve?
In a summary, blockchain solves multiple problems:
- There is no central point of failure of the database
- It helps the removal of trusted 3rd parties and thus eliminates the administrative cost
- The database is tamperproof.
- It helps in better integration of processes, thus making such processes faster.
- It provides high-level security through its consensus methods (Note the more decentralized a blockchain, the more secure it is)
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